Appeals Upheld in Disallowance Case for Bogus Purchases | CIT(A) Decision Upheld | CBDT Circular

The appeals by both the Revenue and the assessee were heard regarding the disallowance of bogus purchases for assessment years 2008-09 and 2011-12. The CIT(A)'s decision to restrict the disallowance to 2% instead of the initial 3% was upheld due to the legitimate nature of the assessee's diamond manufacturing and export business. The Revenue's appeals were dismissed based on the tax effect falling below the threshold set by CBDT Circular No. 3/2018. The assessee's appeals were partially allowed, resulting in a modified order reducing the addition to 2% of the bogus purchases.

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Issues: Cross appeals filed by Revenue and assessee against the order of CIT(A) for assessment years 2008-09 and 2011-12 regarding the disallowance of bogus purchase.

The judgment revolves around cross appeals filed by the Revenue and the assessee against the CIT(A)'s order for assessment years 2008-09 and 2011-12 concerning the disallowance of bogus purchases during the assessment under section 143(3) read with section 147 of the Income Tax Act. The AO initially disallowed 12.5% of the bogus purchase, which was later restricted to 3% by the CIT(A) based on VAT and custom duty rates. Both parties appealed this decision. The Revenue's appeals were dismissed due to the tax effect being less than Rs. 20 lakhs, as per CBDT Circular No. 3/2018. However, the merits of the addition upheld by the CIT(A) were thoroughly analyzed. The assessee provided various documents and information to support their case, including ledger accounts, bank statements, sales details, and export documents. The AR argued that since all purchases were used for export, the addition of 1% for VAT was unjustified. The DR supported the AO's decision.

Upon review, it was noted that the assessee was involved in manufacturing and exporting diamonds. The documents submitted by the assessee, such as ledger copies, bank statements, and export sales forms, indicated a legitimate business operation. Since the goods in question were exported, the 1% addition for VAT was deemed unnecessary. Consequently, the CIT(A)'s order was modified, reducing the addition to 2% of the bogus purchases instead of the initial 3%. As a result, the Revenue's appeals were dismissed due to the tax effect, while the assessee's appeals were partially allowed for the relevant assessment years. The judgment was pronounced in open court on August 13, 2018.

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